Spending cap breach leads to defections in Brazil’s economic team

Bruno Funchal, Brazil’s Treasury and Budget Secretary, and Jeferson Bittencourt, the National Treasury Secretary, as well as their deputies, have resigned from their posts. Their decision comes after Economy Minister Paulo Guedes caved to political pressure to poke holes in the federal spending cap to pay for cash-transfer programs that could increase President Jair Bolsonaro’s chances of re-election.

Markets had been expecting Mr. Funchal to jump ship since Tuesday, when the government had first decided to create a new program to replace and expand the world-renowned Bolsa Família scheme. But having four simultaneous resignations in the top echelon of the economic team could well be some kind of record.

Over 17 million families will receive, between next month and December 2022, at least BRL 400 (USD 70) per month — but the cash-strapped government will need Congress to approve extraordinary credit for the program to fit inside the public purse. Back in July, Mr. Funchal said the budget could handle payments of “around BRL 300, to have something left for investments.”

During a Tuesday event hosted by JPMorgan, Mr. Funchal had a defeated look on his face when commenting about the possibility of breaching the constitutional cap. “It was a political decision. From Congress, from the government, and from the president,” he told major investors. “We are fighting for the best. We try to do the best, that’s all we can do.”

JPMorgan’s chief economist in Brazil, Cassiana Fernandez, replied by saying the secretary was “fighting the good fight.”Financial markets crashed in Brazil today — and the rout should continue tomorrow as investors react to the resignations, even if all four said they will give the administration time to find their replacements.

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